Secret Foreign Bank Accounts – FBAR & FATCA Tax Crimes

Secret Foreign Bank Accounts – FBAR & FATCA Tax Crimes

Golding & Golding – U.S. and International Tax Lawyers

The IRS and DOJ have increased enforcement of international tax laws such as FBAR, FATCA and proper reporting of PFIC (8621) and Foreign Corporations (5471). Thus, if you have committed a financial crime overseas, you may be more like to become subject to criminal charges in the United States than in years past.

With that said, there are alternatives minimize the financial damage and criminal exposure. OVDP is the Offshore Voluntary Disclosure Program and it is a program designed to facilitate tax compliance for individuals, businesses, and trusts that may have committed tax crimes overseas.

Foreign Tax Crime

As a US taxpayer, you are required to report and disclose all of your foreign account information as well as pay tax on the foreign earnings. If your failure to report foreign accounts and pay US tax on foreign earnings was willful (which generally means “intentional”) then you could be subject to criminal investigation and prosecution.

The reason why you may be subject to criminal prosecution is because when you intentionally fail to disclose foreign earnings and assets this is considered a type of tax fraud and tax evasion. In other words, by failing to report your offshore assets and income in the United States – and paying US tax on the earnings – the US government is “losing out” on tax money should be receiving. As a result, you have now committed a tax crime.

Foreign Tax Crime Can Usually be Avoided

Oftentimes an individual or business intentionally fails to report or pay US tax on foreign earnings because they misunderstand the law. That is because they are unaware that if the individual or business already paid taxes overseas then they are generally entitled to a foreign tax credit for possibly qualify for the foreign earned income exclusion.

If you are unaware of these credits and/or exclusions and believe you would have to pay tax twice, this may mistakenly cause you to hide or keep your foreign accounts and earning secret, when you could have just disclosed the information and possibly avoided any additional US tax on the earnings.

OVDP

OVDP is a long process, but as long as you qualify for preclearance then you are generally authorized to enter the program, pay any outstanding taxes and penalties — and although not guaranteed, usually almost always avoid criminal prosecution.

The following is a summary of the OVDP process:

It is nearly impossible to turn on the news these days and not hear something about international tax law. Whether it is the implementation and enforcement of FATCA (Foreign Account Tax Compliance Act), the reporting requirements under the FBAR Rules (Report of Foreign Bank and Financial Accounts), or the discovery of additional Foreign Banks and Foreign Financial Institutions that helped U.S. Taxpayers facilitate offshore tax evasion, international tax law is big news – and big business.

To date, the IRS has recovered billions of dollars from individuals and businesses that have submitted to OVDP(Offshore Voluntary Disclosure Program) and there is no sign of the IRS slowing down their enforcement activities.

Golding and Golding are very experienced OVDP lawyers. Our International Tax Lawyers have represented applicants in OVDP and Streamlined Applications worldwide in over 35 countries.

This page is designed to provide you with a basic summary of OVDP, as well as the interplay between OVDP and FATCA.

OVDP and FATCA – An Introduction

As a US taxpayer (US citizens, Legal Permanent Residents, and Foreign Nationals otherwise subject to US income tax and reporting requirements), you are required to report and disclose your foreign bank accounts, foreign financial accounts, and certain offshore assets – as well as report your foreign income on an FBAR, Schedule B, and 8938 Form.The main reason for the United States’ sudden interest in international tax law is because the Internal Revenue Service (IRS) has recovered billions of dollars from taxpayers who did not comply with international tax law filing requirements.

Examples of Reportable Accounts include:

Foreign Bank Accounts

Foreign Savings Accounts

Foreign Investment Accounts

Foreign Securities Accounts

Foreign Mutual Funds

Foreign Trusts

Foreign Retirement Plans

Foreign Business and/or Corporate Accounts

Insurance Policies

Foreign Accounts held in a CFC (Controlled Foreign Corporation); or

Foreign Accounts held in a PFIC (Passive Foreign Investment Company)

The failure to timely and properly report foreign income and overseas assets and accounts can result in staggeringly high penalties, which the Internal Revenue Service enforces against all taxpayers. If you find yourself in this impossible situation, what are your options?

The most common option for individuals and businesses that have unreported and undisclosed offshore and foreign accounts is to enter the OVDP (Offshore Voluntary Disclosure Program). OVDP is the International Tax Law Program for U.S. Taxpayers (including Legal Permanent Residents and Expats) seeking IRS tax law compliance. The main reason why people enter the OVDP is because by doing so, they can almost always avoid criminal prosecution of their international tax crimes.

Minimal Unreported Foreign Income

It is important to keep in mind that “Account Values” and “Culpability” are two completely different concepts. In other words, knowingly or willfully failing to report offshore assets and foreign income, no matter how small,is considered tax evasion and/or tax fraud and can subject a person to criminal prosecution and penalties reaching 100% of the account value (as well as outstanding taxes, interest and other fines).

Why Enter the OVDP Program?

The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.

The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.

What Type of Accounts Qualify Under OVDP?

Any account that would have to be included on either an FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property (reduced by any outstanding mortgage) would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.

What are the Requirements of OVDP?

The goal of OVDP is to bring individuals and businesses with unreported foreign and overseas accounts and income into U.S. Tax law compliance. While the requirements may seem overwhelming, if you select an international tax attorney who is experienced in handling these types of submissions, it can be a fairly simple routine — even in this sophisticated area of law — while providing you protection under the Attorney-Client Privilege.

The Result: A stress-free compliance plan program that works for you, your family, and your business to bring you into compliance!

The Key points to OVDP are as follows:

OVDP Pre-Clearance Letter

First, the OVDP Applicant submits a request to enter the OVDP Program (Pre-Clearance). The OVDP pre-clearance letter is simple and straightforward. Essentially, the taxpayer is asking Internal Revenue Service’s criminal investigation unit whether they will qualify for submission. In other words, before a taxpayer is required to divulge all of his/her foreign financial information to the IRS, the taxpayer will have the opportunity to know if they qualify for the program.

For the most part, Pre-Clearance is standard procedure and unless the taxpayer is under a criminal investigation by the Internal Revenue Service or other government authority, the applicant should qualify for the program.

IRS Criminal Investigation Unit Evaluation

The IRS Criminal Investigation Unit determines if the applicant is “cleared” for entrance into the OVDP program. Generally, the process should not take more than 30 days. At around 30-day mark, if the applicant has been successfully approved, then the attorney or applicant (if the applicant directly submitted to the program) will receive a letter from the Internal Revenue Service confirming the applicant’s entry into the program and requesting that the initial OVDP application be submitted within 45 days of the date of the letter.

The next phase (45-day letter submission) is not the full submission, but rather, it is a summary of the information the taxpayer is going to submit under the program and includes more specific information about the bank accounts, account numbers, and other identifying information.

Initial OVDP Application Submission

After the Internal Revenue Service receives the applicant’s OVDP letter and attachments, the Internal Revenue Service will review the information. If it is sufficient, then the IRS will send a second letter requesting that the taxpayer submit the full, comprehensive Offshore Voluntary Disclosure Program Application. The next phase of the OVDP is much more intensive and requires the preparation and submission of several documents to the Internal Revenue Service for their review and approval.

Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.

Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).

The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount. For example: if the taxpayer owed $20,000 in taxes over the last eight years then they would also have to include in check the amount of $4,000 the cover the 20% penalty on the $20,000 in outstanding taxes, as well as estimated interest.

What Are the Fees/Penalties under the OVDP Program?

In accordance with OVDP filing requirements, the Applicant will then be required to pay the outstanding tax along with estimated interest, a 20% penalty on the outstanding tax, as well as an “FBAR” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).

For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.

Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid CRIMINAL PROSECUTION!

When it comes to the Streamlined Program, the penalty is limited to 5% on the highest “year-end” balance for the last 6 years. The reason is that if the person was non-willful, they should not be overly-penalized if there was an artificial increase in the value of the bank accounts – such as from the sale of a home during the tax year.

Why Should You Enter the OVDP Program?

It’s simple: if you qualify to enter the IRS OVDP Program, then you can significantly reduce your outstanding tax penalties and usually avoid criminal prosecution.

Under the new FATCA laws (Foreign Account Tax Compliance Act), thousands of Foreign Financial Institutions (FFIs) are reporting foreign income, assets, and bank and financial accounts belonging to U.S. Citizens, Legal Permanent Residents, and Non-Residents who live in the U.S. or maintain a U.S. address. Once the IRS gets wind of this information and begins an examination, you are disqualified from entering either the OVDP or Modified Streamlined Programs.

Moreover, many of these FFI’s are starting to freeze and even forfeit the money in these accounts if the account owner cannot prove compliance with FBAR filing, FATCA, and OVDP (if applicable).

FLAT-FEE & FULL-SERVICE

Our experienced International Tax Lawyers and Enrolled Agents (Highest Tax Credential issued by the IRS) have represented numerous individuals and businesses in over 35 countries with OVDP. Unlike other firms, our Tax Attorneyshandle the entire OVDP Application process and Streamlined Program application process in-house, on a flat-fee arrangement from start-to-finish – including preparing applicant tax returns. We do not “pawn” you off to an Associate or accountant – usually with little to no experience in International Tax Law and OVDP.

Be Aware – Fraud Warning!

In the last few years, we have been repeatedly contacted by individuals letting us know that they were “sold” by inexperienced attorneys and CPAs with no real International Tax experience (CPAs may have Accounting or Auditing experience, but not necessarily any ‘Tax’ experience) who “scared” them into entering the program before they felt ready to do so. Unfortunately, these unscrupulous attorneys use scare tactics and “low introductory fees” to bait taxpayers, which results in the OVDP Applicant(s) suffering serious tax issues and complications with the IRS.

Our flat fee, in-house arrangement allows our clients to concentrate on getting themselves and their families OVDP compliant, while allowing our firm to stand by our clients in every phase of process, each step of the way!

OVDP & STREAMLINED SUCCESS!

- Successfully Represented Highly Compensated Earners in a Streamlined Program Disclosure with more than 175 Accounts.

- Successfully represented a non-willful client through the Streamlined Program, even though he had multiple accounts at "Bad Banks" including accounts in a Tax Haven jurisdiction.

- Successfully received notification from the IRS of no penalties being issued against a high-income earning family with more than 20+ foreign accounts worldwide, including India and Canada. Based on their specific facts and circumstances, we were able to submit them using the Reasonable Cause option.

- Successfully completed a multi-person comprehensive disclosure matter for a family with submissions involving both Offshore Disclosure and Reasonable Cause applications.

- Acceptance of a Streamlined Domestic Offshore Disclosure Program submission for a client with multiple accounts, which had several U.S. Taxpayer signatories and more than $1,000,000 of funds in Costa Rica, and secured a full-penalty waiver.

- We successfully represented high-net-worth international taxpayers after their CPA fumbled an audit which left taxpayers with nearly $1,000,000 in penalties, and secured both spouses’ acceptance into the IRS Domestic Offshore Streamlined Program.